2015 (8) TMI 1037 - AT - Income Tax

Disallowance u/s.14A - assessee submitted that no disallowance is warranted since the interest free funds available with the assessee in the form of share capital, reserve and surplus, and the same were used for the purpose of investment in assets, the income from which shall not or does not form part of the total income - Held that - Admittedly, in this case the assessee is having enough interest free funds in the form of share capital and reserve and surplus. The amount of investment made by the assessee is less than the interest free funds. Further, Rule 8D was introduced with effect from 24.03.2008, which was prospective in operation and cannot be regarded as being retrospective as held by Delhi High Court in the case of Maxopp Investment Ltd vs. CIT 2011 (11) TMI 267 - Delhi High Court . However, incurring certain administrative expenses cannot be ruled out. Thus we direct the Assessing Officer to disallow 2% of exempt income as income expenditure towards earning that income - Decided partly in favour of assessee. Whether disallowance, if any, under section 14A should go to increase the profit derived from the eligible undertaking(s)/ unit(s) for purpose of sections 10A? - Held that - This issue is squarely covered by the order of the Bombay High Court in the case of CIT vs. M/s. Gem Plus Jewellery India Ltd 2010 (6) TMI 65 - BOMBAY HIGH COURT , wherein it was held that the assessee was entitled to exemption u/s.10A with reference to addition or disallowance of various payments, as the plain consequence of the disallowance and add back made by the Assessing Officer is an increase in the business profits of the assessee and the same to be considered for the purpose of computation of deduction u/s.10A of the act. Adopting the similar principle, we are inclined to direct the Assessing Officer to consider the disallowance u/s. 14A r.w Rule 8D as part of business profit so as to compute deduction u/s.10A of the Act. - Decided partly in favour of assessee. Travelling expenses incurred in foreign currency - whether are to be reduced from total turnover also for the purpose of computation of deduction u/s.10A ? - Held that - This issue is squarely covered by the order of in the case of ITO vs. SAK Soft Ltd, (2009 (3) TMI 243 - ITAT MADRAS-D) wherein it was held that for the purpose of applying the formula under-sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Inclusion of disallowed expenditure under Section 14A in the profit for Section 10A deduction.
3. Reduction of foreign currency travel expenses from total turnover for Section 10A deduction.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee company invested Rs. 92.35 crores in shares/funds as of 31.03.2008 and earned dividends of Rs. 4,92,32,251, which were claimed as exempt under Section 10(34) of the Act. The Assessing Officer (AO) noted that the assessee did not segregate any expenditure attributable to these investments and invoked Section 14A read with Rule 8D, determining the attributable expenditure at Rs. 37,28,239 and disallowed the same.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, noting that the assessee did not maintain separate books for investments and that both interest-free and interest-bearing funds were pooled together. The CIT(A) relied on the Bombay High Court decision in Godrej Boyce Mfg Co Ltd v. CIT, which validated the application of Rule 8D from the Assessment Year 2008-09 onwards. The CIT(A) emphasized that disallowance under Section 14A is related to efforts made to earn exempt income, not the exempt income itself, citing the ITAT Delhi Special Bench decision in Cheminvest Ltd. v. ITO.

The Tribunal, however, noted that the assessee had sufficient interest-free funds and ruled that no disallowance under Section 14A read with Rule 8D was warranted. Instead, the Tribunal directed the AO to disallow 2% of the exempt income as expenditure towards earning that income, citing the jurisdictional High Court decision in Simpson & Co Ltd.

2. Inclusion of disallowed expenditure under Section 14A in the profit for Section 10A deduction:
The assessee contended that any disallowance under Section 14A should increase the profit derived from eligible undertakings for Section 10A purposes. The CIT(A) did not adjudicate this ground. The Tribunal referenced the Bombay High Court decision in CIT vs. M/s. Gem Plus Jewellery India Ltd, which held that disallowances leading to increased business profits should be considered for Section 10A deduction. Thus, the Tribunal directed the AO to include the disallowance under Section 14A as part of business profit for computing the Section 10A deduction.

3. Reduction of foreign currency travel expenses from total turnover for Section 10A deduction:
The Revenue appealed against the CIT(A)'s decision to reduce foreign currency travel expenses from total turnover for Section 10A computation. The Tribunal cited the Special Bench Chennai decision in ITO vs. SAK Soft Ltd, which stated that expenses incurred in foreign exchange for providing technical services outside India should be excluded from both export turnover and total turnover. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal by directing a 2% disallowance of exempt income under Section 14A and including such disallowance in the business profit for Section 10A deduction. The Tribunal dismissed the Revenue's appeal, affirming the reduction of foreign currency travel expenses from total turnover for Section 10A computation. The order was pronounced on 19.06.2015.